Where might we be headed on business rate retention?

27 Mar 18

CIPFA’s Jo Pitt looks at the direction of travel for local government retention of business rates and what to expect over the coming months.

The housing, communities and local government committee is always an interesting source of information, especially when there is a new minister in front of them.

Accepting a level of political diplomacy in the answers, many of the responses provide an excellent insight into Whitehall thinking and the direction of travel for social policy.

Recently the minister in the hot seat was Rishi Sunak, parliamentary under secretary at MHCLG, who tackled questions on business rates, fair funding and financing local government.

All topical subjects at the current time, when council tax bills, with rises of 5%, are falling on the door mat.

So what did we learn about business rates and funding?

The minister covered the forthcoming timetable around business rates and the Fair Funding Review, which includes technical papers in five specific areas this spring, plus a fair funding technical paper in the summer.

By the winter, a broad outline of the way both business rates and fairer funding scheme will work should have emerged, although no indicative numbers will be included.

Following a consultation in this spring/summer, 2019 will see the release of some indicative numbers, probably to coincide with the spending review that is expected early 2019.

For those of us who have just completed their response to the fairer funding consultation, it will be interesting to see how this broader system takes into account the feedback.

CIPFA‘s response to the review contained a number of recommendations reflecting our concerns about the increasing disconnect between funding and service delivery expectations.

Mr Sunak went on to reiterate the fact that the 75% retention of business rates had to be fiscally neutral, but when questioned about the 100% quantum, he gave an indication this would not necessarily be the case.

This could mean a little extra for local government, although not in the short term. The assertion was repeated by chancellor Philip Hammond, during his Spring Statement on 13 March, but the question of where that money will come from is still unanswered, especially if the economy continues to grow only slowly.  

The members of the committee questioned the minister on income in a broader context and raised questions about the need to ensure all income would be taken into account when looking at local government funding and distribution.

Mr Sunak assured the committee that the government is looking at other sources of revenue such as car parking. This will be good news for some authorities, but less so for those authorities, such as Westminster, that raised £73.2m in surplus car parking fees in 2016-17.

He wasn’t to be drawn in to a discussion on social care funding, but recognised the need to have a sustainable way of financing this area in the long term. There are currently calls for evidence and suggested solutions on how this can be achieved.

CIPFA’s recent submission to parliament’s ‘Long-term funding of adult social care’ inquiry put forward the idea of setting the tax take dedicated to health and social care at 24%, rather than the current 22%, which would enable an extra £14bn to be invested. This is in line with CIPFA’s assessment of what the system is likely to need.

What was worrying was a lack of a long-term planning for the future of local government funding. Short term, we know about the changes in business rates and the projections of council tax revenue, however, there is still nothing really about addressing the disconnect between the funding envelope and the increase in demand for council services.

Demographics and forecasting by the Institute for Fiscal Studies suggests there is very little to indicate that the economy will improve rapidly over the short term.

It is increasingly important to consider a longer term approach to funding public services, one where we recognise that the current system of taxation, income generation and service cuts will not be sufficient to pay for services needed in the future.

This longer term question was not addressed by the committee, but it was raised and we look forward to seeing what Mr Sunak has to say about this in the coming months. 

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